Doing business in Iran
09 September 2015
Introduction and agenda
EU, US and UN government-imposed sanctions – Adrian Nizzola, Partner, Simmons & Simmons
Temporary limited easing of sanctions – Adrian Nizzola, Partner, Simmons & Simmons
The Joint Comprehensive Plan of Action ("JCPOA") – Adrian Nizzola, Partner, Simmons & Simmons
Post-sanctions era in Iran – an end to isolation? – Najib Hashem, Principal Director, Deloitte Corporate Finance Limited
Reputation and Integrity Risk Concerns - Ralph Stobwasser, Managing Director, Deloitte Corporate Finance Limited
Establishing a Presence in Iran – Cyrus Shafizadeh, Partner, Atieh Associates
An overview of the Iranian tax regime – Alex Law, Partner, Deloitte & Touche (M.E.)
Questions and answers
© Simmons & Simmons LLP 2015. Simmons & Simmons is an international legal practice carried on by Simmons & Simmons LLP and its affiliated partnerships and other entities.
1
EU, US and UN governmentimposed sanctions – Adrian Nizzola, Partner, Simmons & Simmons
EU, US and UN government-imposed sanctions
Sanctions imposed by EU, US and UN for Iran’s failure to comply with treaty obligations of non-nuclear proliferation
EU Sanctions: prohibitions and/or restrictions on:
the import, purchase, transport, financing and insurance of Iranian crude oil and petroleum products
transfers of funds between EU and Iranian banks and financial institutions
EU based credit and financial institutions establishing a new presence in Iran
the sale, supply, export, transfer, purchase, import or transport of equipment or technology in relation to crude oil, natural gas and the petrochemical industry
the provision of technical assistance, brokering services, financing services or financial assistance in relation to oil and gas technology
Who do the EU sanctions apply to? Any:
legal person, entity, or body organised under the law of an EU Member State;
individual nationals of a Member State, wherever located;
activity occurring within the territory of the EU; and
aircrafts or vessels under a Member State's jurisdiction
How are the EU sanctions enforced?
Direct application to all EU Member States
Member States are responsible for implementing regulations
Fines and imprisonment apply for convictions
© Simmons & Simmons LLP 2015. Simmons & Simmons is an international legal practice carried on by Simmons & Simmons LLP and its affiliated partnerships and other entities.
3
EU, US and UN government-imposed sanctions US sanctions
The US sanctions on Iran relate to:
Iranian petroleum industry
Imports from Iran
Exports to Iran
Dealing in Iranian-origin goods or services
Financial dealings with Iran
"Pre-zero contracts" (Letters of Credit and other financing arrangements with respect to trade contracts)
Banking services
Who do the US sanctions apply to?
US citizens, including:
permanent resident aliens regardless of where they are located;
all persons and entities within the United States; and
all US incorporated entities and their foreign branches
How are the sanctions enforced?
Through the Office of Foreign Assets Control ("OFAC") which operates under the auspices of the US Treasury Department
Fines and imprisonment apply for convictions
© Simmons & Simmons LLP 2015. Simmons & Simmons is an international legal practice carried on by Simmons & Simmons LLP and its affiliated partnerships and other entities.
4
EU, US and UN government-imposed sanctions UN sanctions
UN sanctions include provisions calling on Member States to:
prevent the provision of financial services, or the transfer of any financial or other assets or resources where such services, assets or resources could contribute to Iran’s proliferation-sensitive nuclear activities or the development of nuclear weapon delivery systems;
take appropriate measures that prohibit the opening of new branches, subsidiaries, or representative offices of Iranian banks; and
prohibit Iranian banks from establishing new joint ventures
© Simmons & Simmons LLP 2015. Simmons & Simmons is an international legal practice carried on by Simmons & Simmons LLP and its affiliated partnerships and other entities.
5
Temporary limited easing of sanctions – Adrian Nizzola, Partner, Simmons & Simmons
Temporary limited easing of sanctions The JPOA
A Joint Plan of Action ("JPOA") was signed in Geneva back in 24 November 2013 between Iran on one side, and the USA, France, Germany, UK, China and Russia (the P5+1) on the other
The agreement that was reached temporarily eased sanctions on Iran (in certain limited areas) in return for Iran committing to curb its nuclear programme
The temporary Limited relief has been effective since 20 January 2014, and will continue until wider sanction relief becomes effective under the JCPOA (the "JPOA Period")
Under the JPOA, the US will not impose:
certain financial sector sanctions on foreign financial institutions that conduct or facilitate financial transactions for non-US persons for the sale, supply or transfer to Iran of good or services used in connection with sectors where sanctions have been temporarily lifted; and
certain blocking sanctions on non-US persons who provide assistance (including goods or financial, material or technological support) to or in support of dealing within the sectors where sanctions have been temporarily lifted
However, activities must begin and end during the JPOA Period for it to fall within the scope of the JPOA
The EU has announced that it will prolong the suspension of EU restrictive measures agreed in the JPOA until 14 January 2016 . The US has also announced its intention to extend the JPOA sanctions relief and is likely to adopt an approach similar to the EU
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7
Temporary limited easing of sanctions The JPOA (continued)
Iran benefits from easing of certain US sanctions related to:
the release of USD4.2bn of Iranian assets held abroad in eight instalments between USD450m and USD550m
exports of petrochemical products from Iran (petrochemical products defined as including any aromatic, olefin and synthetic gas and their derivatives)
the provision of automotive goods and services to Iran including shipping, warranty underwriting services, insurance or reinsurance and maintenance services in connection with the sector
the trading with Iran in gold or precious metals, permitting non-US persons to sell, supply or transfer to or from Iran precious metals, including gold
the supply of commercial aviation parts and services to Iran – licensable transactions may involve Iran Air, but may not involve other Iranian airlines listed on OFAC's Specially Designated Nationals and Blocked Persons List ("SDN List")
the establishment of a financial channel to facilitate humanitarian trade for Iran's domestic needs using Iranian oil reserves held abroad
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8
Temporary limited easing of sanctions The purchase of crude oil
The US State Department will not seek further reductions from the current purchasers of crude oil (China, India, South Korea, Turkey, Japan and Taiwan)
The six authorised import jurisdictions would be allowed to continue buying current average amounts of crude oil – 1 million b/d
Banks in the consuming countries will not face being cut off from the US financial system during the JPOA period
© Simmons & Simmons LLP 2015. Simmons & Simmons is an international legal practice carried on by Simmons & Simmons LLP and its affiliated partnerships and other entities.
9
The Joint Comprehensive Plan of Action ("JCPOA") – Adrian Nizzola, Partner, Simmons & Simmons
The Joint Comprehensive Plan of Action ("JCPOA")
The Joint Comprehensive Plan of Action ("JCPOA") was signed between Britain, China, France, Germany, Russia and the US (EU+3) and Iran on 14 July 2015
Under the JCPOA, UN, US and EU sanctions will begin to be relaxed once there is an IAEA-verified implementation of agreed nuclear-related measures outlined under the JCPOA (what is being referred to as 'Implementation Day')
UN Security Council ("UNSC") sanctions
The proposed lifting of UNSC sanctions applies only to UNSC sanctions relating to the Iranian nuclear issue (please refer to UN sanctions described on slide 5)
The UNSC passed a resolution, Resolution 2231 (2015), endorsing the JCPOA on 20 July 2015
Specifically, the JCPOA proposed to lift UNSC sanctions provided for under UNSC Resolutions 1696 (2006), 1737 (2007), 1803 (2008), 1835 (2008), 1929 (2010) and 2224 (2015)
UNSC Resolution 1929 (2010)
This resolution was key for its assertion that Iran's energy, financial and other sectors of the Iranian economy supports Iran's nuclear programme
Calls for voluntary restraint on sanctions with Iranian banks, particularly Bank Melli and Bank Saderat
Calls for vigilance on international lending to Iran and providing trade credits and other financing
UNSC Resolutions 1737 (2007), 1803 (2008) and 1929 (2010)
Freezes the assets of Iranian persons and entities names in the annexes
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11
The Joint Comprehensive Plan of Action ("JCPOA") (continued) EU sanctions The relevant EU sanctions to be lifted are:
transfers of funds between EU persons and entities, including financial institutions, and Iranian persons and entities, including financial institutions
banking activities, including the establishment of new correspondent banking relationships and the opening of new branches and subsidiaries of Iranian banks in the territories of EU Member States
provision of insurance and reinsurance
supply of specialised financial messaging services, including SWIFT, for persons and entities set out the JCPOA, including the Central Bank of Iran and Iranian financial institutions
financial support for trade with Iran (export credit, guarantees or insurance)
commitments for grants, financial assistance and concessional loans to the Government of Iran
transactions in public or public-guaranteed bonds
import and transport of Iranian oil, petroleum products, gas and petrochemical products
export of key equipment or technology for the oil, gas and petrochemical sectors
investment in the oil, gas and petrochemical sectors
export of key naval equipment and technology
design and construction of cargo vessels and oil tankers
provision of flagging and classification services
access to EU airports of Iranian cargo flights
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The Joint Comprehensive Plan of Action ("JCPOA") (continued) EU sanctions (continued) The relevant EU sanctions to be lifted are:
export of gold, precious metals and diamonds
delivery of Iranian banknotes and coinage
export of graphite, raw or semi-finished metals such as aluminium and steel, and export or software for integrating industrial processes
designation of persons, entities and bodies (asset freeze and visa ban) set out in the JCPOA
associated services for each of the categories above.
© Simmons & Simmons LLP 2015. Simmons & Simmons is an international legal practice carried on by Simmons & Simmons LLP and its affiliated partnerships and other entities.
13
The Joint Comprehensive Plan of Action ("JCPOA") (continued) US sanctions The US will cease the application of sanctions covering:
financial and banking transactions with Iranian banks and financial institutions as specified in the JCPOA, including the Central Bank of Iran and specified individuals and entities identified as 'Government of Iran' by the US Treasury Department's Office of Foreign Assets Control ("OFAC") SDN List, as set out in JCPOA (including the opening and maintenance of correspondent and payable through-accounts at non-US financial institutions, investments, foreign exchange transactions and letters of credit)
transactions in Iranian Rial
provision of US banknotes to the Government of Iran
bilateral trade limitations on Iranian revenues abroad, including limitations on their transfer
purchase, subscription to, or facilitation of the issuance of Iranian sovereign debt, including governmental bonds
financial messaging services to the Central Bank of Iran and Iranian financial institutions set out in the JCPOA
underwriting services, insurance, or reinsurance
efforts to reduce Iran's crude oil sales
investment, including participation in joint ventures, goods, services, information, technology and technical expertise and support for Iran's oil, gas and petrochemical sectors
purchase, acquisition, sale, transportation or marketing of petroleum, petrochemical products and natural gas from Iran
export, sale or provision of refined petroleum products and petrochemical products to Iran
© Simmons & Simmons LLP 2015. Simmons & Simmons is an international legal practice carried on by Simmons & Simmons LLP and its affiliated partnerships and other entities.
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The Joint Comprehensive Plan of Action ("JCPOA") (continued) US sanctions (continued) The US will cease the application of sanctions covering:
transactions with Iran's energy sector
transactions with Iran's shipping and shipbuilding sectors and port operators
trade in gold and other precious metals
trade with Iran in graphite, raw or semi-finished metals such as aluminium and steel, coal, and software for integrating industrial processes
sale, supply or transfer of goods and services used in connection with Iran's automotive sector
sanctions on associated services for each of the categories above
removal of individuals and entities set out in the OFAC's Foreign Sanctions Evaders List
US sanctions that prohibit US firms from doing business with Iran are not affected by the JCPOA:
The US trade ban does not bar subsidiaries of US firms from dealing with Iran – as long as the subsidiary has no operational relationship to – or control by – the parent company, discussed further below
Foreign subsidiaries are considered foreign persons and are subject to the laws where incorporated
US trade sanctions apply to foreign subsidiaries if:
the subsidiary is more than 50% owned by the US parent;
the parent firm holds a majority on the subsidiary's board of directors; or
the parent firm directs the operations of the subsidiary
© Simmons & Simmons LLP 2015. Simmons & Simmons is an international legal practice carried on by Simmons & Simmons LLP and its affiliated partnerships and other entities.
15
The Joint Comprehensive Plan of Action ("JCPOA") (continued)
The US Government will however license non-US persons that are owned or controlled by a US person to engage in activities with Iran consistent with the JCPOA and license the importation into the US of Iranian origin carpets and foodstuffs and sales to Iran of commercial aircraft. The OFAC has stated that they will provide further guidance on the JCPOA closer to 'Implementation Day'
The US sanctions that are to be suspended are primarily those that sanction foreign entities and countries for conducting specified transactions with Iran. US sanctions that generally prohibit US firms from conducting transactions with Iran are not being altered under the JCPOA. However, the JCPOA does commit the US to license the sale to Iran of commercial aircraft, and the importation of Iranian luxury goods such as carpets, caviar, and some fruits and nuts
Under the JCPOA, the US is to revoke the designations made under various Presidential Executive Orders of numerous Iranian economic entities and personalities, including the National Iranian Oil Company (NIOC), various Iranian banks, and many energy and shipping-related institutions. This includes several ships and planes. That step would enable foreign companies to resume transactions with those Iranian entities without risk of being penalised by the US
Not all US sanctions will be lifted, only those relating to nuclear proliferation, e.g. the embargoes on exporting arms and missiles to Iran will remain for five and eight years respectively, and will apply to all UN members as well. US sanctions to remain in place include those, amongst others, under:
the OFAC-issued Iranian Transactions and Sanctions Regulations;
Iran-Iraq Arms Non-Proliferation Act;
Iran-North Korea-Syria Non-Proliferation Act; and
certain provisions of the Comprehensive Iran Sanctions, Accountability, and Divestment Act of 2010 ("CISADA") and the Iran Threat Reduction and Syrian Human rights Act
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The Joint Comprehensive Plan of Action ("JCPOA") (continued) Iran's commitments Under the JCPOA, Iran's commitments include:
imposing limitations on uranium enrichment and uranium enrichment activities (including research and development) for the first eight years, followed by enrichment at a reasonable pace strictly for peaceful purposes
redesigning and rebuilding the Arak reactor and Fordow facility to be used for peaceful functions
maintaining its uranium stockpile under 300kg of up to 3.67% enriched uranium hexafluoride (UF6 - used in the uranium enrichment process)
clarifying past and present outstanding issues relating to its nuclear program with IAEA
allowing the IAEA to monitor voluntary transparency measures stated in the JCOPA:
a long-term IAEA presence in Iran;
IAEA monitoring of uranium-ore concentrate produced by Iran from all uranium-ore concentrate plants for the next 25 years;
containment and surveillance of centrifuge rotors and bellows for the next 20 years;
use of IAEA approved and certified modern technologies including on-line enrichment measurements and electronic seals; and
commitment to a reliable dispute resolution mechanism to ensure a speedy resolution of IAEA access concerns for the next 15 years
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17
The Joint Comprehensive Plan of Action ("JCPOA") (continued) Dispute Resolution Mechanism and 'snap-back'
a procedure to ensure that both the E3/EU+3 and Iran uphold their commitments drawn out under the JCPOA
Process and timeline: Step One
Step Three
Step Two
Issue is discussed by Joint Commission consisting of 15 days representatives from both the E3/EU+3 and Iran
The ministers of foreign affairs of each JCPOA to consider issue
15 days
Joint Commission may consider the Advisory Board's 5 days opinion
Step Four
UNSC to consider issuing resolution to continue sanction relief
30 days
Issue may be referred to an Advisory Board consisting of three members (one from either side of the complaint and a third independent member) to provide non-binding opinion
UNSC Sanctions 'snap-back' if no UNSC resolution
The commercial risk of doing business in Iran is in effect that sanctions could be reinstated at no more than 65 days’ notice The JCPOA only refers to UNSC sanctions with regards to the 'snap-back' mechanism, and does not make specific provisions relating to EU or US sanctions. However, the ability of complaining parties to cease performing JCPOA commitments suggest parties could unilaterally re-impose sanctions 18 © Simmons & Simmons LLP 2015. Simmons & Simmons is an international legal practice carried on by Simmons & Simmons LLP and its affiliated partnerships and other entities.
The Joint Comprehensive Plan of Action ("JCPOA") (continued) Timeline: Endorsement by UNSC
90 Days
20 July 2015
8 Years
Finalisation Day
Adoption Day 18 October 2015
14 July 2015
Duration for US Congress to review or approve JCPOA
Submit to US Congress 19 July 2015
82 Days
17 September 2015
12 Days
12-day window for Presidential veto against any disapproval by the US Congress 29 September 2015
10 Days
Transition Day 2023 or 2024
Termination Day 2025 or 2026
Any remaining nuclear related sanctions on Iran will be removed
Provided that no UNSC sanctions have been reinstated.
Iran will also have to abide with additional enhanced inspections and 'Transition Day' will only occur once the IAEA issues a report stating that all nuclear materials in Iran remain in use for peaceful activities.
This date marks the termination of the JCPOA, closing the file related to the Iranian nuclear issue
Q1/Q2 2016
'Implementation Day' will occur once the Iranian Parliament has reviewed or ratified the JCPOA and, importantly, when the IAEA issues a report verifying that Iran has indeed implemented its nuclear related obligations
60 Days
The initial vote for disapproval of the bill implementing the JCPOA
Implementation Day
10-day window for US Congress to override the Presidential veto
10 Years
On 'Transition Day‘, the EU will terminate all remaining proliferationrelated sanctions
9 October 2015
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Post-sanctions era in Iran – an end to isolation? – Najib Hashem, Principal Director, Deloitte Corporate Finance Limited
Iran has a large, young and well-educated population…
Population
78.5 mn
Population growth p.a. (2009-2014) Median age
Population breakdown
Cities with 500k+ population
17
28.3
Cities with 100k+ population
67
23.9%
15-29
28.3%
30-44
24.8%
45-59
14.5%
Mean years at schooling 1 Najib Hashem, Principal Director, Deloitte Corporate Finance Limited
73%
1.31%
0-14
60+
Urbanization
Cities with 500k+ population
8.4% 15.1 Source: EIU (2014), Worldatlas (2014) 1 Most recent data - 2012
21
…that has been suffering from the sanctions, slowing growth, depreciating currency and decreasing purchasing power GDP (2014)
GDP Growth p.a.
$425.3 bn
CPI Change (2014)
17.2%
GDP Growth p.a. (2012-2014)
-1.5%
CPI Change p.a. (2012-2014)
27.2%
GDP per capita (2014)
$5.4k
IRR depreciation against $ p.a. (2012-2014)
34.7%
2002
4.9%
2012
-1.5%
2014
700
$bn
600 500 400 300 200 100 0 2002
2003
2004
2005
2006
Najib Hashem, Principal Director, Deloitte Corporate Finance Limited
2007
2008
2009
2010
2011
2012
2013
2014
Source: EIU
22
Iran has diversified economy. Sanctions have had adverse impacts on industry sectors, with infrastructure suffering most due to cancelled or delayed projects
Najib Hashem, Principal Director, Deloitte Corporate Finance Limited
Source: Iran Central Bank, 1 2008-2012 CAGR
23
The sanctions have resulted in a trade imbalance and a shift towards the East. Imports have been steady while recent exports have suffered from the reduced oil price Foreign Trade Volume ($ bn) 150 Imports 100 36 38 31 29 22 18 19 25 14
49
37
90
80
68 50
117
108
Exports
51
66
59
46
84
54
60
53
2010
2011
2012
64 46
56
64
0 2001
2002
2003
2004
2005
Import Origins
2006
2014
2007
2008
2009
Export Destinations
2013
2014
2014
China
43.8%
China
42.8%
India
7.9%
India
17.5%
Korea
7.5%
Turkey
15.3%
Turkey
7.0%
Japan
9.6%
Germany
5.7%
S. Korea
7.1%
Najib Hashem, Principal Director, Deloitte Corporate Finance Limited
Source: ITC Trademap
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Iranian exports are heavily hydro-carbons dependent Import categories are fragmented Foreign Trade Volume ($ bn) Import Categories
2014
Export Categories
2014
Machinery, nuclear reactors, boilers, etc.
14.6%
Mineral fuels, oils, distillation products, etc.
79.0%
Electrical, electronic equipment
9.6%
Plastics and articles thereof
5.0%
Cereals
8.8%
Organic chemicals
3.6%
Vehicles other than railway, tramway
5.6%
Ores, slag and ash
3.4%
Iron and steel
5.5%
Edible fruit, nuts, peel of citrus fruit, melons
2.1%
Plastics and articles thereof
4.4%
Iron and steel
1.0%
Articles of iron or steel
3.5%
Salt, sulphur, earth, stone, plaster, lime and cement
0.9%
Furniture, lighting, signs, prefabricated buildings
3.0%
Inorganic chemicals, precious metals, isotopes
0.7%
Optical, photo, technical, medical, etc., apparatus
2.7%
Fertilizers
0.7%
Paper and pulp
2.5%
Copper and articles thereof
0.4%
Pharmaceutical products
2.2%
Edible vegetables and certain roots and tubers
0.3%
Residues, wastes of food industry, animal fodder
2.2%
Aluminum and articles thereof
0.3%
Animal, vegetable fats- oils, cleavage products, etc.
2.1%
Carpets and other textile floor coverings
0.2%
Others
2.3%
Others Total - $ Najib Hashem, Principal Director, Deloitte Corporate Finance Limited
33.2% 55.7bn
Total - $
65.2 bn Source: ITC Trademap
25
Iran’s oil exports decreased from 2.4 million barrels per day (2011) to 1.4 million barrels (2014). Once sanctions are lifted, presanctions export levels can be expected within 6-12 months Iran exports of crude oil and condensates (million barrels per day) 3.5
3
US sanctions on Iran Central Bank EU import ban started
2.5
Joint Plan of Action is established
2
1.5
1
0.5
Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 Jan-12 Feb-12 Mar-12 Apr-12 May-12 Jun-12 Jul-12 Aug-12 Sep-12 Oct-12 Nov-12 Dec-12 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 Dec-13 Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14 Aug-14 Sep-14 Oct-14 Nov-14 Dec-14
0
Source: EIA Najib Hashem, Principal Director, Deloitte Corporate Finance Limited
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Iran has a number of well established stock markets
Tehran Stock Exchange market cap - $bn 200 150 100 50 0 2006
2007
2008
2009
2010
2011
2012
2013
2014
2015 July
Top 10 Industries, as a % of total market cap 1 25%
23%
20%
17%
14%
15%
9%
10%
8%
7%
7%
5% 0%
Chemicals & Byproducts
Monetary Intermediation
Basic Metals
Holdings
Najib Hashem, Principal Director, Deloitte Corporate Finance Limited
Post & Telecom
Refined & Nuclear Fuel
5% Metal Mining
4%
3%
3%
Automotive
Logistics
Pharma
Source: Tehran Stock Exchange, 1 July 2015
Others
27
Sanctions have constrained trade and distorted the business environment but the Iranian economy continues to function
Najib Hashem, Principal Director, Deloitte Corporate Finance Limited
28
The post-sanctions era will be subject to major uncertainties: the basis of competitive advantage can shift and apparently successful business strategies can become obsolete
Najib Hashem, Principal Director, Deloitte Corporate Finance Limited
29
When examining market opportunities and potential target companies, buyers will need to exercise caution and perform careful due diligence
Najib Hashem, Principal Director, Deloitte Corporate Finance Limited
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Reputation and Integrity Risk Concerns - Ralph Stobwasser, Managing Director, Deloitte Corporate Finance Limited
The Lingering Sanctions Threat Lifting of international sanctions? Not quite there yet… • For the time being, international sanctions remain in place and will be, in a best case scenario, only be lifted from early 2016. • While the route to lifting UN and EU sanctions has been clearly laid out in the JCPOA, the US has not committed to a specific timetable for lifting nuclear related sanctions, but has indicated that they would be eased over a 6-12 months of the accord. • Even after that there will be residual terrorism-related US sanctions in place which means that foreign investors and banks need to remain vigilant of any direct or indirect potential exposure to SDNs, particularly if the investor / bank is considered a US person. The ‘snapback’ mechanism • The so called ‘snapback’ provision is a dispute resolution mechanism enabling the rapid re-imposition of existing sanctions that was included in the JCPOA. The intent is to deter Iranian defection from its obligations, by entrenching the costs of doing so. • Such a ‘snapback’ scenario could leave foreign investors and banks exposed to Iran under a newly imposed sanctions regime. Iranian counterparts will be conscious of this threat, too, and may be asking for performance bonds / guarantees. • The diplomatic and political cost of a ‘snapback’ however is high. Iran could counter this with threats of nuclear escalation. Ralph Stobwasser, Managing Director, Deloitte Corporate Finance Limited
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The Political Economy of Iran From Khatami to Ahmadinejad and on to Rouhani – who and what next? • Assuming everything stays on track to lifting of sanctions which promises a large windfall and opening up of markets, reformists and centrists are expected to dominate the upcoming parliament (to be elected in early 2016). This would give Rouhani’s administration more support to boost the economic reform agenda and support foreign investment. • That saying, the investment landscape is not all friendly. The Islamic Revolutionary Guard Corps (‘IRGC’), in particular sees foreign - especially Western - investments not only as a potential threat to the country’s national security, but also to their influence in the economy. • The reach of parastals and in particular the IRGC into the Iranian economy has been growing since the 1990s and further expanded under Mahmoud Ahmadinejad’s presidency. However ultimate ownership of IRGC linked companies is not necessarily apparent. Outside companies might therefore find themselves exposed, if they don’t do their homework, particularly when IRGC will largely remain under terrorism-linked U.S. sanctions. • Investors will need to continue monitoring the interplay between the government, the religious establishment and the IRGC. Looking outside • In the meantime, the prospect of Iran entering back into the global financial and oil markets received an uneasy response from suspicious neighbours. GCC countries (with the exception of Oman), worried about an economically stronger Iran increasing its role as a regional power broker, have responded with caution, especially over Iranian supreme leader Ayatollah Ali Khamenei's remarks that Iran would continue to support movements against the state in Yemen, Palestine, Syria, Iraq and Bahrain. Investors need to consider their interests in the GCC countries vs. their potential gains in Iran. • Israel and anti-Iran lobbying groups similarly are going to remain concerned over the lifting of sanctions and may look to campaign against companies and financial institutions that will become active in Iran. Ralph Stobwasser, Managing Director, Deloitte Corporate Finance Limited
33
What you need to be aware of… Corruption risk is high • Ranked 136 out of 174 in Transparency International corruption perception index 2014. The economy is dominated by government and parastatals giving rise to bribery and corruption concerns. Need to identify whether the officers of a company can be deemed government officials or not. • As a newly opening market, there will be agents and intermediaries swarming around interested investors and trade partners. There is a need to be cautious of who you choose to engage with and what are the proposed means of winning business. Anti-bribery and corruption legislation does not allow to hind behind third party actions. Know who you are doing business with • The private sector is fairly small and enquiries in the market will help establish who are the key players in each sector; where it becomes more difficult is where companies are government-owned or held by parastatals where there has been a change of guard or ownership following a wave of ‘privatization’ after 2006. Even companies that have historically invested and traded with Iran will find the that the faces in the companies they had previously dealt with have changed and will need to re-assess the suitability of their counterparties or investment targets. • It is not always easy to distinguish between purely private-owned companies and those with direct or indirect involvement of the state. Investors need to understand who they are dealing with, what is the political exposure and which type of political exposure they are comfortable with. Anti-money laundering / counter terrorist financing risk is high • Basel AML Index 2015 shows that Iran has the highest risk score out of 152 countries. The Financial Action Task Force, a global anti-money laundering and anti-terrorism finance standards body, warned that Iran’s “failure to address the risk of terrorist financing” poses a “serious threat … to the integrity of the international financial system.” • International banks are not likely to be first movers; they will follow after regional banks, as they weigh the cost of non-compliance vs. the rewards of getting exposure to Iran. USD14 billion worth of punitive fines and the residual risk, even after sanctions, of money laundering and terrorist financing will leave them cautious. Ralph Stobwasser, Managing Director, Deloitte Corporate Finance Limited
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AML and Corruption Risk – Iran in comparison
160
High AML risk
Iran
Myanmar Nigeria
120
Pakistan Russia
100
China
Turkey
UAE 80
Germany
India
Saudi Arabia
60
Low AML risk
Basel AML Index Ranking 2015
140
High corruption risk
Transparency International CPI Ranking 2014 and Basel AML Index Ranking 2015
40
20
US France
UK
Egypt
Low corruption
0 0
Finland
20
40
60
80
100
120
140
160
180
Transparency International CPI Ranking 2014 Ralph Stobwasser, Managing Director, Deloitte Corporate Finance Limited
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Establishing a Presence in Iran – Cyrus Shafizadeh, Partner, Atieh Associates
If all EU, US and UN sanctions were lifted in Iran, how would a foreign investor set up business in Iran? Introduction
Legal vehicles available for establishing a presence in Iran
The Foreign Investment Laws
Dispute Resolution
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37
Legal vehicles available
Companies
Branches
Distributorship
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38
Legal vehicle: Companies
The Commercial Code of Iran provides for seven forms of companies.
The vast majority are formed as either:
joint stock companies; or
limited liability companies
Joint stock companies can be public (mainly used for listing purposes) and private
Most companies registered by foreign shareholders are registered as either private joint stock companies or limited liability companies
All companies have a legal personality that is separate to its members and can contract and sue/be sued in their own right
All companies are considered to be Iranian and can (save a few exceptions) perform all activities that are allowed by Iranian private persons (real and legal). Such activities include land ownership
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The Foreign Investment Laws
The Foreign Investment Protection and Promotion Act ("FIPPA") and its Implementing Regulations 2002 – Main law for foreign direct investment
Bi-lateral Investment Treaties – amongst others
Switzerland
Poland
South Korea
Italy
Qatar
China
Spain
France
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The Foreign Investment Laws (continued) FIPPA: types of investments
Direct Foreign Investment in the fields where private sector activity is allowed (Equity Investments)
Foreign investments that fit within one of the "Civil Partnerships", "Buybacks", or "Build, Operate and Transfer (BOT)" schemes (Non-equity Investments)
FIPPA: repatriation of profit and capital
The principal, interest and profits of Foreign Investment may be transferred abroad upon fulfilment of outstanding obligations.
Repatriation in one of several ways:
through purchase from the banking network (Central Bank is obligated to supply the foreign currency with proper approvals);
by use of foreign currency earned from exports; and/or
by export of other goods authorized under the applicable laws
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Dispute resolution
Choices are Iranian courts, foreign courts and arbitration
Judgments handed down by foreign courts enforced in Iran under certain conditions, the most important of which is reciprocity
Foreign investors in Iran may feel uncomfortable with Iranian courts
Arbitration is a good compromise and is recommended
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Arbitration
Iranian law recognises arbitration as a dispute mechanism procedure in its constitution and its laws
The courts of Iran refuse jurisdiction when an arbitration agreement is in place
Iran has adopted arbitration law based on the UNCITRAL model (with variations)
Local arbitration is enforced under the Code of Civil Procedure
International arbitration is enforced under the New York Convention
The parties are free to use the rules of arbitration of foreign arbitral bodies (ICC LCIA etc)
Only issue is arbitration which involves government or public property
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Arbitration: Principle 139
Principle 139 of the constitution provides: ‘The settlement of claims relating to public and state property of the referral thereof to arbitration is in every case dependant on the approval of the Council of Ministers, and the Assembly must be informed of these matters. In case where one party to the dispute is a foreigner, as well as important cases that are purely domestic, the approval of the Assembly must also be obtained. Law will specify the important cases intended here.’
This has far-reaching effects and can cause many problems for companies entering into contracts with government or public entities
Various mechanisms have been adopted to reduce the effect of the provisions of Principle 139, none of which are totally satisfactory
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An overview of the Iranian tax regime – Alex Law, Partner, Deloitte & Touche (M.E.)
Introduction • Business entities − The principal business entities for foreign businesses operating in Iran are public and private limited companies, and branches of a foreign company. − It is also possible to establish a representative office, for marketing and promotional activities only. A representative office / branch performing such marketing activities (without entering into transactions) is not subject to income tax. • All foreign investors doing business in Iran or deriving income from sources in Iran are subject to taxation. Depending on the type of activity the foreign investor is engaged in, different taxes and exemptions are applicable. • Residence − A business entity is deemed to be resident in Iran if it is registered in Iran or if it is managed and controlled in Iran. • Territorial coverage − Resident companies are taxed on their worldwide income. Foreign sourced income is taxed in the same manner as income derived from Iranian sources. − Non-resident companies (e.g. branches and representative offices) are taxed on income derived from their contracts signed inside or outside Iran for work performed in Iran. Alex Law, Partner, Deloitte & Touche (M.E.)
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Headline tax rates • The relevant tax authority in Iran is the Iranian National Tax Administration (INTA). • Corporate income tax − The headline corporate income tax rate in Iran is currently a flat rate of 25%. All companies are subject to the same corporate tax rate, regardless of the nationality of the company (i.e. foreign or Iranian). • VAT − The overall VAT rate as of March 21, 2015 is 9%. • Withholding tax (“WHT”) − Dividends; There is no withholding tax on dividends paid by Iranian companies to nonresident shareholders. − Interest; Interest paid by an Iranian company to a foreign company is subject to a withholding tax of 5% on the gross amount. − Royalties; Payments received by non-residents for royalties (i.e. granting of licenses, knowhow, patents etc.) should be subject to withholding tax of 5%/ 7.5%. • Income tax − Income taxes are levied at progressive rates between 0% - 20%.
Alex Law, Partner, Deloitte & Touche (M.E.)
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Tax considerations for foreign investors •
Trade free zones; companies that are registered and licensed to operate in any of the free-zones below are exempt from corporate tax for 15 years on income derived from their activity in the free trade zone: − Kish Island − Qeshm Island − Chabahar − Aras − Anzali − Arvand − Maku
•
Double taxation treaties - the countries which signed agreements for the avoidance of double taxation with Iran are: − Algeria, Armenia, Austria, Bahrain, Belarus, Bosnia and Herzegovina, Bulgaria, China, Croatia, Cyprus, France, Georgia, Germany, Indonesia, Jordan, Kazakhstan, Kuwait, Kyrgyzstan, Lebanon, Malaysia, Pakistan, Poland, Qatar, Romania, Russia, South Africa, Spain, Sri Lanka, Sudan, Switzerland, Syria, Tajikistan, Tunisia, Turkey, Turkmenistan, Ukraine, Uzbekistan, Venezuela, Yemen and Zimbabwe.
Alex Law, Partner, Deloitte & Touche (M.E.)
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Questions
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Appendix One: Potential Implications under JCPOA
Potential Implications under JCPOA General
Removal of 444 companies/individuals, 76 planes and 227 ships from sanctions list
Ability to access USD115bn of frozen oil revenues (half of which will be available – roughly USD58bn is tied up in contracts and non-performing loans)
Oil and Gas
Iran currently has the fourth largest proven oil reserves in the world
Potential to double oil exports from 1.1 mbd level of JPOA Period within six months approximately 50 million barrels of oil currently stored
Iran's Ministry of Petroleum is currently working on a new contract model, Integrated Petroleum Contract ("IPC"), which is intended to replace the current buyback scheme
Iran is the world's joint-third largest natural gas producer (with Qatar)
Potential gas pipelines and LNG projects
Refinery and oil and gas infrastructure
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Potential Implications under JCPOA (continued) Renewables and Power
At the end of 2013, Iran's installed electricity capacity was around 70,000MW. Iran intends to install 5,000MW of solar power by the end of 2018
European-based renewable energy companies have signed agreements for projects in Iran - Italy's Fata was awarded a EUR 500m (USD 548m) contract to build a power station in Bandar Abbas
Spain's renewable energy specialist, Bester Generación, signed an 18-month contract to provide engineering services to the Iran Power & Water Equipment and Services Export Company (Sunir)
Transport Industries
Iran's Civil Aviation Organisation recently announced that Iran plans to purchase 80 to 90 planes a year from Airbus and Boeing in the first phase of renovating its national carrier, Iran Air, until 300 planes are in place to replace its aging fleet
European automobile manufacturers
Flow of Capital
Re-joining SWIFT
Tehran Stock Exchange (market cap. USD118bn)
Iran Mercantile Exchange
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Potential Implications under JCPOA (continued) Life Sciences
Medical supplies and pharmaceuticals
Stem cell research and nanotechnology
Technology and Telecommunication
In 2014, MTN Irancell (Iran's second largest mobile phone network operator, 49 percent owned by South Africa-based MTN Group) launched the country's first 4G LTE network across nine cities
Fibre-optic network development
22.9-odd million internet users
Approximately 25 percent of Iranians are smartphone users with around 68.9 million cellular phone users
© Simmons & Simmons LLP 2015. Simmons & Simmons is an international legal practice carried on by Simmons & Simmons LLP and its affiliated partnerships and other entities.
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Important notice This document and the related communication (“Information”) prepared by Simmons & Simmons, Atieh Associates, Deloitte Corporate Finance Limited and Deloitte & Touche (M.E.) (together the “Presenters”), have been prepared solely for the ‘Doing Business in Iran’ webinar dated 9 September 2015. The Information contained in this document has been compiled by the Presenters and includes information obtained through open source research. The Information contains material proprietary to the Presenters. In particular, it should be noted that any financial an/or statistical information contained in this document is preliminary and not audited. No reliance may be placed for any purposes whatsoever on the contents of this document or on its completeness. No representation or warranty, express or implied, is given and no responsibility or liability is or will be accepted by or on behalf of the Presenters or by any of its partners, employees, agents or any other person as to the accuracy, completeness or correctness of the information contained in this document or any other oral information made available and any such liability is expressly disclaimed. This document and its contents are confidential and may not be reproduced, redistributed or passed on, directly or indirectly, to any other person in whole or in part without the prior written consent of the Presenters.
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